Category: Google

The Aggregation Paradox

Yaron GalaiLeave a comment

With the incredible ease of data aggregation that the web has introduced, an increasing number companies are now involved in the "Aggregation Paradox".

In this aggregation world, a company is either:

  • A Source – Sites that are creators of original content, whether it’s news articles, real estate listings, job postings, etc.
  • An Aggregator – A site that aggregates original content from multiple Sources, and combines all those sources into a single user experience.

A few examples of these relationships:

The dynamics of the Aggregation Paradox:

  • Sources are eager to attract users, regardless of who sends them over and how they do it. If the entity sending them traffic isn’t charging them anything – the Sources become even more ignorant to the entity handing them traffic.
  • The Aggregator’s value proposition to the user is almost always better than that of any single source it aggregates. Why search 1 source — the aggregator rightly claims — when you can find data from 100 sources at once?
  • The content production costs fall almost exclusively on the Sources. This means that aggregators can be extremely flexible with how they monetize their service. For example, sticking a couple of AdSense ads around the aggregated content can usually create a very healthy and high-margin business for the Aggregator. This is a luxury the Sources hardly have due to the high production costs involved in creating the content.
  • The more Sources are aggregated into an Aggregator, the less significant each Source becomes. For example, a news aggregator that has only one Source for financial news will be severely affected if that source pulled out of aggregation. But if the Aggregator has 100 financial news Sources, the dropping of one Source would be practically an un-noticeable event.

 

Combine all of the above and we get the Law of Aggregation:

Galai’s 1st Law of Aggregation: A Source that’s being aggregated will see short term benefit while ceding long-term power to the Aggregator.

 

…which leads to the Aggregation Paradox:

The Aggregation Paradox – If a Source is aggregated, the Aggregator will prevail. If a Source is NOT aggregated, it doesn’t matter and the Aggregator will prevail. 

 

I don’t envy Sources having to deal with the dilemma that the Aggregation Paradox introduces to their business. And with Google becoming very aggressive as an aggregator (shopping, movies, autos and travel just to name a few) many companies that serve as Sources are in real jeopardy of going out of business if they don’t quickly become aware of the Aggregation Paradox and its implications to their business.

Fortunately, not all is doomed for Sources. I’ll cover all the options at their disposal for dealing with the Aggregation Paradox in a followup post.

Disclosure: Chicago Tribune and Realtor.com are both clients of Quigo which I have founded and where I am currently employed. I highly recommend clicking those two links and enjoying their wonderful news and real-estate services.

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On Google Finance and financing by Google

Yaron GalaiLeave a comment

Jason Calacanis definitely gets it:

Google, of course, has taken a hard line from inception that they are not in competition with their content providers who run Google Adsense. However, Google Finance will certainly give pause to finance partners who run Adsense. Those partners have to now ask themselves “by running adsense are we supporting our competitor?“

If you’re a decision maker at a media company with online presence, you better listen to Jason… this comes from the guy who built a ~$30M (estimated) media company by relying mostly on AdSense for revenue.

This reminded me of a short story on the topic. For the sake of simplicity, lets abbreviate the names of the companies involved to (btw – why are the letters A, B or X, Y always used?….) – companies F and G.

Baseline: F Company (or – “FC”) is an online media company that has a loyal
readership and has its own ad sales force. It has long standing
relationships with many of the prominent advertisers in its space.

Year 1: FC decides to replace a bunch of its ads with ads provided by G
Company (or – “G”). In parallel, it downsizes its in-house ad sales force
and forgoes many of the advertiser relationships it had maintained in
previous years. Year 1 turns out to be great – ad revenues are roughly the same as
before, but costs are down due to the reduced sales force.

Year 2: The monthly check from G keeps coming, and FC decides to outsource its whole ad sales to G, while relieving its
entire ad sales team. G now has direct ad relationships with most of
the advertisers that used to advertise directly with FC in the past. Revenues are decent, even if somewhat stagnant.

Year 3: G rolls out a new channel with content scrapped from FC as
well other sources on the web, making it superior to the content that
FC provides. Users love it and flock to G’s content.

Status of both companies at the end of year 3:

G – Has great content, a loyal and growing readership and a wealth of advertiser relationships.

FC – Has content, but readership is declining.
It has no advertiser relationships at this point, and relies on one of its biggest
competitors for revenues.

Is your company one press release away from leaving you obsolete and with no direct advertiser relationships?

Full disclosure: As co-founder of Quigo I will benefit if you make the wise decision and switch over to AdSonar after reading this blog…

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